Dodd-Frank compliance is a burden for small banks, experts say

On Dec. 3, experts from small financial institutions testified during a House Small Business subcommittee on investigations about the burden of Dodd-Frank compliance on small banks and credit unions.

Small businesses have too much to worry about already. When words like compliance are uttered, small business owners may cringe with uncertainty or see their costs soaring. Others may ignore the word, pretending it doesn't exist, and hope not to get caught.

Small business compliance involves doing a lot of administrative work to please various government agencies. Sure, these rules and regulations provide necessary societal safeguards, but they also distract banks from important tasks, like finding new customers and getting ahead of the competition. However, if not dealt with properly, compliance issues affect the bottom line.

Unfortunately, small financial institutions do not have teams of attorneys and consultants to work on compliance and tend to drain resources that could have gone toward working with customers. It may be some time before the impact of post-recession bank reform reaches small financial institutions in the U.S., but compliance with the Dodd-Frank law demands resources -- time and money -- to navigate the new regulatory landscape.

On December 3, light was shed on this situation in the form of testimony from experts appearing at a hearing of the House Small Business subcommittee on investigations, oversight and regulations.

“Assuring compliance takes an inordinate amount of time away from what we should be doing,” said B. Doyle Mitchell Jr., president and CEO of Washington-based Industrial Bank, at the hearing. “Community banks should be exempt from Dodd-Frank overall.”

He estimated that his employees devote 10 percent of their workdays to regulatory issues, like ensuring mortgage applications meet the requirements of the Consumer Financial Protection Bureau. In addition, Linda Sweet, president and CEO of Big Valley Federal Credit Union, said her organization spends about $50,000 on legal advice— money that could have gone to customers. She said, “Our legal staff has a complete segment of their practice devoted to dealing with compliance.”

According to Paul Merski, ICBA executive vice president and chief economist, the majority of compliance costs cut into the bottom line. “The net interest margin for banks is very thin,” he explained. “Each additional cost of compliance really cuts into their ability to remain profitable. There's not much slack to pick up those extra costs.”

Meanwhile, Georgetown University Law Center Professor Adam Levitin said many portions of Dodd-Frank have not gone into effect yet and it is too early to assess the damage the law causes to small banks. According to Levitin, there is insufficient evidence to make the case for a compliance burden. “There is no hard data about extent of the impact of compliance costs,” he said.

Mitchell has urged policymakers to pass the Community Lending Enhancement and Regulatory Relief Act, in order to loosen the grip of Dodd-Frank reforms on small banks.